Market News & Analysis

Top Story

Apple set for stellar service sales

Earnings need to live up to this week’s record high in the shares

Apple reports Q4 earnings on Wednesday 30th October, after the U.S. market close. Here’s what to expect.

Stock fall

Apple shares may be slipping on Tuesday, but a new record high at the start of the week, just days away from the release of its quarterly earnings, shows investors expect a progressive quarter, despite known challenges.

Did we mention services?

The main focus of the three months ending on 30th September will almost inevitably be services, services and more services. Revenue growth in the segment that includes Music, TV, App Store, Health, Pay and more, will continue to eclipse growth shown by Apple’s still-dominant revenue generator, iPhones. Still, services will take a few more years to approach anything like the sales contributed by handsets. Consequently, overall revenue growth is expected to be slim in Q4.

High hopes return

Yet the stock’s leading position in the relative performance of FAANG shares this year signals that investors are now fully aboard the services story. The lack of 5G in the latest iPhone points to only a modest overall growth in Q4, ahead of Apple launching that facility in September 2020. Instead, investors have set their sights on a potential record quarter for services. Wall Street expects a 21% surge. If it materialises, it would be one of the strongest quarterly growth rates in the segment Apple has ever reported.  A rebound in mobile-game sales in China has been cited as a potential boost for App Store revenue, which accounts for about a third of service sales.

China challenges

Given such optimism though, risks to the stock now include unforeseen headwinds that could throw service sales off course. The slowdown in China could yet have difficult to predict consequences. The recent discovery of iPhone demand elasticity to higher prices is already an awkward though inescapable happenstance that may be tied to plateauing China and U.S. growth.

Trade, tariffs, dollar

Additionally,  gross margin impact from recently tariffed Mac Pro, though probably modest, would be a warning about more painful compression should the trade war escalate with Apple in the crossfire. The potential impact on Apple’s gross margins should the trade war escalate will be a conference call hot topic. With the dollar hitting levels not seen since May 2017 at one point in the past quarter, investors will also be alert to any signs that slower growth outside of the U.S. is beginning to bite into Apple’s outlook.

Key financial expectations

Adjusted Q4 EPS: $2.18, -5.7% year-on-year

Q4 Revenue: $53.81bn, +1%

Q4 gross margin: 37.9% vs. 37.6% in Q3

Q1 2020 revenue guidance: $86.51bn, up 2.6%

Q1 2020 EPS: $4.42, up 5.5%

(Consensus forecasts compiled by Bloomberg)

From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.